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In light of the U.S. Supreme Court’s pivotal Wayfair decision, Friedman’s Michael Sacco, Partner, sat with Alan Goldenberg, Principal in the firm's State and Local Tax Group, to discuss the decision's far-reaching impact in regard to e-commerce and wholesalers.
Michael Sacco: Can you share some historical background on this Supreme Court ruling?
Alan Goldenberg: What makes this ruling so profound is that it overturns the 26-year-old Supreme Court decision in Quill, and will essentially affect all online shoppers, retailers and wholesalers. States can now levy sales tax on sales of goods and services, even if the seller has no physical presence in the taxing state. As more states—currently 36— propose laws requiring remote sellers to collect and remit sales tax, e-commerce, the online retail industry and wholesalers must understand how this change will impact both sides of the coin.
Sacco: Can you explain “economic nexus” and how it will affect our clients?
Goldenberg: Economic nexus is a threshold mandated by a state which, if surpassed, results in a state having the authority to tax out-of-state businesses. For example, in the Wayfair case, South Dakota’s economic nexus applies if a remote seller engages in $100,000 of in-state sales or 200 separate in-state transactions. However, with respect to certain states, the sales thresholds or in-state transaction amounts may differ.
Sacco: Which states have started enforcing their economic nexus statutes?
Goldenberg: As of July 1, Hawaii, Kentucky, Oklahoma and Vermont have begun enforcing their respective economic nexus statutes. Accordingly, if in the previous calendar year a seller had over $100,000 of sales into Hawaii, Kentucky or Vermont, or 200 separate transactions into any of these states, it should begin collecting sales tax immediately.
Sacco: Can you give us an example of how states are executing variations of this statute?
Goldenberg: Oklahoma has a different test whereby out-of-state sellers making sales into the state of $10,000+ per year must either:
1. provide in-state sales information annually to the taxing authorities so they can collect use tax from the in-state purchasers, or
2. elect to collect and remit sales tax.
Mississippi is the next state to begin enforcing its Wayfair law as of September 1, which applies to remote sellers with more than $250,000 of sales into the state. Twelve additional states join the fray starting October 1, with others following suit in the next few months.
These new economic nexus thresholds apply to all remote sellers—not just retailers. Moreover, they apply to traditional brick-and-mortar businesses who ship items to other states.
Sacco: Many of our clients are wholesalers. How are they impacted by a resale exemption?
Goldenberg: All states provide for a resale exemption. Goods purchased to be resold in the same form in which they are purchased qualify for a sales tax exemption that removes the requirement to pay sales tax on the goods. However, resale exemptions are only granted when certain certificates are collected and maintained. The resale exemption does not, provide an exemption from the filing of a sales tax return. A wholesaler is required to register as a state sales tax vendor and file zero sales tax returns claiming the sales as exempt under the resale exemption.
In light of the Wayfair decision, remote retailers and wholesalers must now be cognizant of their sales by state. This refers to revenues and transaction volume in order to determine economic nexus applicability. Multistate nexus studies can help identify those states where remote sellers have sales and use tax obligations.
Sacco: What are some best practices for wholesalers and retailers to ensure compliance?
Goldenberg: Below are a number of best practice tips for wholesalers and retailers to ensure proper sales tax compliance. Noncompliance penalties, even for no tax due returns, and sales tax audits can become very costly, very quickly.
1. Know where your business has nexus. As your business enters a new market, you should be mindful of what activities do and do not create nexus. Physical presence was the standard for the last 50+ years but that all changed after Wayfair. Do you have a significant presence in a state where you are not filing a sales tax return? Evaluate your physical presence and sales into the state and learn about the nexus rules where you might have a tax connection.
2. Understand the filing requirement of each jurisdiction. Once nexus is determined, you should review state taxing authority rules to determine filing specifics. Some states require everything from electronic filing to advance payment to specific forms.
3. File sales tax returns correctly. Too often companies get in trouble or complicate the audit process when they have errors either in their calculation or reporting of sales tax. Whether it is a minor error, such as charging the wrong rate on an invoice, or a severe gaffe, like failing to remit taxes that were collected, the audit process changes dramatically once the auditor believes there is a reason to probe.
4. Review your tax exempt sales compliance. If an auditor showed up at your doorstep today, would you be able to provide exemption certificates for the last three years of sales? When was the last time you reviewed the exemption certificates you have collected to determine which are expired? How many certificates are missing information or need updating? While many companies, particularly wholesalers, have trouble with these questions, failure to address these items can lead to onerous liability when in fact certain transactions should not be taxable.
5. Perform an internal audit risk assessment. Conducting a pre-audit or reverse audit before you get an audit notice lets you find and correct errors. Engaging sales tax experts to participate in the process helps ensure problematic areas are tackled. An internal audit will allow you to better address bookkeeping “adjustments” such as credit memos, reversal and errors, which often become areas of contention in a tax examination.
6. Finally, avoid becoming a sales tax audit target. Since most states have automated systems selecting companies for sales tax audits, predicting whether you will be audited is not a sure bet. However, there are certain factors that do make companies more vulnerable than others. Some businesses are targeted because of their size or sales volume. Others may be chosen because of a specific event, like the acquisition of a company. But one of the biggest factors states look at is whether the company has been audited before and the outcome of that audit. Not surprisingly, if you have been audited in the past, you will likely get audited again, especially if the past audit proved successful for the state. Obviously, these factors are difficult to control, but one should be mindful of a few things:
a. High volume of sales can lead to errors, as it is easy to make a mistake. Automated point of sales systems can help prevent the most common errors.
b. Late filed sales tax returns often become the subject of additional state scrutiny, especially if such filings are habitually filed after their respective due dates.
c. Improperly collecting tax from customers may be detected in an audit of a customer. The auditor will potentially take note of the seller’s invoice and initiate an audit of the seller.
The most important thing to remember about sales tax for retailers and wholesalers is that technically the sales tax should never come out of their pocket. The end-user customer has the obligation to pay the requisite tax. While it is next to impossible to conduct sales tax audits of individuals, states pursue the “big fish” – businesses where the state can collect the missing tax of multiple taxpayers – and for that reason choose to audit companies with significant in-state activities. Officers and directors of such companies must be on notice to ensure that their sales tax requirements are met, because under state laws they are deemed “responsible persons” who can be held personally liable for any outstanding tax obligations of the company. Accordingly, the best defense for retailers and wholesalers is a good offense.
As states tighten their sales tax nets using Wayfair-type rules, the need for a business to get its sales tax controls in order becomes paramount. Contact Alan Goldenberg at agoldenberg@friedmanllp.com or your Friedman advisor to ensure your business is ready for impending changes under the new Wayfair decision.
To learn more, register for our upcoming webinar, here.